Liquidity Crunch And Unspent Budget
At present, banks are not in a position to make further lending because of unavailability of loanable funds. As per the directives of Nepal Rastra Bank, the central regulatory body in Nepal, the credit to deposit (CD) ratio should not exceed the threshold of 80 per cent. However, the CD ratio of almost all banks hovers at 79 to 80 per cent. Any bank that exceeds this threshold is subject to a penalty. It has been over one year since the liquidity crunch surfaced in the banking sector. When the crisis emerged last year, it was assumed that it would last three months or so. But the crisis has dragged on unabated.
The main motive of banks is to support the economy by making loans to businessmen through mobilisation of deposits and earn a profit for their survival. The main sources of loanable funds are deposits. Due to aggressive lending, almost all banks are suffering from lack of loanable funds. As of Magh of 2074 BS, banks and financial institutions mobilised deposits to the tune of Rs. 2,523.26 billion and disbursed loans to the tune of Rs. 2,223.21 billion.
Banks are now falling over themselves to mobilise deposits even at higher rates. They are now offering interest on fixed deposits up to 11 per cent per annum and that on savings accounts up to 8 per cent. However, they have not been able to mobilise adequate deposits even at higher interest rates. To prevent an interest war, the members of the Nepal Bankers Association (NBA) have made a gentlemen’s agreement to this effect. On the other hand, development banks have also made a similar agreement to provide a maximum of 12 per cent interest on fixed deposits.
How banks are raring to mobilise deposits was shown the other day by the interest war waged by NIC Asia Bank against the remaining members of NBA. Going beyond the threshold on interest agreed to by other members of NBA, NIC Asia boldly announced interest on fixed deposits at 12 per cent and that on savings accounts at 10 per cent, citing that NBA was not the regulatory body to fix interest on deposits and that it could fix interest on deposits on its own in a free market economy. Nepal Rastra Bank did not intervene in this matter. However, NIC Asia Bank could not resist the threat of NBA to expel it from its membership and had to kowtow to the interest threshold as agreed to by NBA.
It is reported that banks are trying to seek deposits even from cooperative societies. In the past, cooperative societies used to fall back upon banks for the safekeeping of their deposits even at low rates of interest. Now, the trend has changed. This also speaks volumes for the liquidity crunch banks have been mired in. There may be several factors that have contributed to the liquidity crunch in the market. One of the pressing factors is the inability of the government to spend money for development projects. During the eight months of this fiscal year, the capital expenditure has stood at 28 per cent of the total capital expenditure budget.
At the time of budget formulation, it was assumed that a bigger budget would be required as provincial and local governments would come into existence within the fiscal year and they would require funds for the development of their areas. Funds have also been allocated to 753 local bodies but the local bodies are in a dilemma as to how to spend the funds and where. This is because the local bodies have not been able to make development plans and an acute shortage of experts has also been felt. It is also reported that the engagement of government employees in elections and other activities has also hampered development works.
Economists blame several factors on the underspending of the budget in development projects. Political interference, lack of commitment on the part of government employees, non-allocation of the budget in a timely manner, existence of some harsh rules, incapability of the government apparatus to make huge expenses, etc. are some of the factors that act as a setback in the timely execution of development projects.
The federal model is a new exercise for Nepal. Federal, provincial and local governments have already been installed. However, deployment of employees to the provinces where required has met with a rebuff from the employees. The provinces are complaining that they have not received the required number of employees. The problem lies in the employees not willing to leave Province 3, the seat of the Federal Parliament. So the government has warned the employees that those who are not willing to go to the provinces they have been assigned to may voluntarily be retired under the VRS.
As things stand, it will take some time for local and provincial governments to be settled. After that, they are expected to make development plans for their areas and spend the allocated budget satisfactorily. As long as the budget is stuck in state coffers, development projects cannot get off the ground. Once the budget is spent profusely, funds will come to banks, thus helping them steer clear of the liquidity crisis. But this may not happen within this fiscal year. The adverse situation is expected to stay till Asar of 2075 BS.
Although the liquidity crunch has benefitted depositors, it is not a healthy sign from an economic standpoint. Due to the stoppage of disbursement of loans, businessmen as well as general people looking for retail loans have been hit hard. This has also affected the economy. So the sooner the liquidity crunch is gone, the better.